The Vice President of a unique investment solutions company is using tech and changing regulations to help shape a new investing environment.
Blaine McLaughlin is Vice President of Business Development for Folio Institutional, a company offering an integrated brokerage and custodial platform with patented, state-of-the-art trading, portfolio management tools, and private placement capabilities.
Under his direction Folio Institutional has developed the first-ever private placement platform that delivers transparency and control for investors, intermediaries, and issuers alike. Mr. McLaughlin is also developing additional services that will support a vibrant secondary marketplace for private securities.
Mr. McLaughlin is a featured speaker at FinFair 2015 which takes place in Manhattan on July 29. Featuring speakers from both the Wall Street establishment and new crowd-centric retail alternatives market, FinFair 2015 will help shape the market of the future.
Folio Institutional was founded in 1999 by Steven Wallman, a former commissioner of the SEC. During his time with the SEC, Mr. Wallman saw investor needs were not completely met by the opportunities provided by existing institutions. One of the reasons Folio Institutional was founded was to provide financial advice professionals the tools to deliver better solutions to their clients.
Mr.McLaughlin explained that as a clearing broker-dealer, Folio Institutional accepts custody of cash and securities for clients. They are one of a handful of large groups in the space.
“Because of the level of regulation, firms need scale to operate and that limits their number,” Mr. McLaughlin explained.
One exciting feature offered by Folio Institutional is an online, self-directed option where the investor can set specific weights for different asset classes and let Folio’s system take care of the rest, Mr. McLaughlin said. It also allows investors with a specific amount to invest the ability to access the same features, he added.
Folio Institutional offers a number of other unique services to investors and advisors. Advisor Connexion allows financial advisors to launch their own online advisory service, picking which modules they want to employ based on their preferred method of client interaction, meaning advisors can adapt the blend based on how comfortable clients are with self-directed online activity. The services are web-based and are completely integrated with the Folio Institutional brokerage platform, he added.
Advisor Connexion allows advisors to work with clients who would not otherwise meet minimum asset requirements through the creation of a self-directed, advised offering. Clients can access portfolios and have their investment choices streamlined through the use of a customized questionnaire.
Folio Institutional also offers more than 100 Ready-to-Go Folios of individual stocks and ETF’s that can be bought, sold or customized in a single transaction. The folios can be based on geography, risk tolerance, investment style, industry sector and other factors.
Advisors can also build and maintain investment models based on those factors. They can combine these models with additional client preferences. Thousands of client portfolios can be quickly updated, Mr. McLaughlin said. When models are updated, Folio automatically calculates and undertakes all individual trades necessary to update participating investor accounts.
Under many pricing plans these trades can be completed commission-free, Mr. McLaughlin explained. Folio’s Window Trading system groups trades twice a day and executes them at either 11 a.m. or 2 p.m Eastern.
“All Window Trades are matched internally when possible before being sent to the market,” Mr. McLaughlin said.
Advisors have the flexibility to sell an entire portfolio at one time and can place orders in dollar amounts instead of shares, enabling them to sell both whole and fractional shares, he added.
Mr. McLaughlin has been working in this sector since 2007, with clients including a pre-IPO Facebook and private REIT owners. He quickly learned non-publicly traded securities were complex and at times risky, and their ownership could be easily faked when held as paper certificates. Such manipulators could redeem those shares, creating legal and security headaches.
“We looked at this and said it is not working,” Mr. McLaughlin recalled.
Back in 2008, banks were not lending to small and medium-sized businesses. Both banks and private equity firms were moving up market to chase bigger fish.
“There was a chasm between $100,000 and as high as $30 million,” he added.
While the JOBS Act was welcomed it did not come with any infrastructure that would allow companies to reach out to thousands of investors at one time, Mr. McLaughlin said.
“We thought we could make an efficient, online subscription and custody service that kept costs down yet accessed crowd capital without being overwhelming by using the online brokerage account model everyone already knows and likes.”
Mr. McLaughlin acknowledged investing in non-publicly traded securities can be risky, especially if you have to purchase larger amounts. But if you make those amounts smaller, then you may be on to something.
“Putting millions of dollars into one such stock would drive an advisor nuts,” Mr. McLaughlin said. “Diversification is crucial.”
Advisors were also presented with difficulties in managing investor funds when participation is limited to a small number of investors, such as 100 in private funds, Mr. McLaughlin explained. Low limits on investors meant high investment minimums and thus increased risk.
It became key to develop the infrastructure to allow issuers to have many shareholders while not having to address the additional administration created by the lower minimums, Mr. McLaughlin said. While most issuers maintain minimum investments of $5,000 or more, with improved technology, processes and scale they hope to be able to support issuers with minimums as low as $100, he believes.
The combination of lower minimums, more investors and fractional ownership allows the risk pyramid to be turned on its head, Mr. McLaughlin said. For example, an advisor could purchase shares in 100 different biotechnology firms to minimize risk across a profitable but risky sector. While many such firms fail, those that succeed often do so by impressive standards.
In an environment undergoing rapid change Mr. McLaughlin said it is difficult to predict how the ecosystem will evolve. One area that will undoubtedly change is how companies and even individual assets are vetted.
In an investment bank, a few people vet companies. Now with the power of the crowd, not only companies but even specific assets can be vetted by more people.
Even though few if any can predict how the private securities markets will precisely look in the future, one thing we should expect is they will be very different that they are today, Mr. McLaughlin believes.
“Instead of heading to one website for one security and then to another for the next, the process will become easier,” he explained. “When BANQ for example makes an offering available for its users, it can permit it for Folio users as well.”
Having an NYSE or NASDAQ-style network of offerings increases investor power by bringing people and offerings together in one place, Mr. McLaughlin said. They will be able to share information and reduce the risk of bad actors who take advantage of isolated investors.
People will be able to buy a cross-section of investments instead of one at a time, Mr. McLaughlin said. That is easy to predict because it is already happening.
“Lending Club has done this as a key part of their current business model,” he explained. “Before an individual research and buy some of a specific loan, now they say give me some “A paper”. Most people just pick the type of paper these days.”
“We will see a very competitive and broad marketplace for all types of securities. It will have a powerful network effect for everyone.”